Severance pay and unemployment

Spanish workers delayed their general strike against austerity measures—including the new labor law—to coincide with the European Day of Action.

The new labor law includes cuts in severance pay, with the excuse that they will lead to lower unemployment. However, new research demonstrates exactly the opposite.

Countries with low levels of severance pay suffer on average twice the size of the drop in employment growth than countries with very high severance payments (Figure 2). It would seem that firms find it more profitable to adjust to a negative shock through lay-offs when severance pay is low. If severance pay is high, firms revert to other means of adjustment. These could include reductions in wages or working time.

Spanish workers know this, too—which is why, in the midst of 20 percent unemployment, millions of them have taken to the streets today.